Tax-Free Savings Account (TFSA)
What it is
A Tax-Free Savings Account is a Canadian registered account that shelters investment growth from tax. Contributions are made with money that's already been taxed — there's no deduction on the way in — but everything that happens inside the account (interest, dividends, capital gains) accumulates untaxed, and withdrawals are tax-free at any time, for any purpose.
Despite the name, a TFSA isn't a savings account. It's a wrapper that can hold almost any qualified investment: cash, GICs, mutual funds, ETFs, stocks, bonds.
Who can open one
Canadian residents aged 18 or older with a valid SIN. There's no upper age limit and no income requirement. Non-residents can hold an existing TFSA but contributions made while a non-resident are penalized at 1% per month.
How contributions work
Contribution room accumulates automatically each year a person is eligible, whether or not they file a tax return. Unused room carries forward indefinitely. Withdrawals are added back to room on January 1 of the following calendar year — so a withdrawal late in the year doesn't restore room until the next tax year.
The CRA is the authoritative source for current-year room. Broker statements often lag by weeks.
Tax treatment
No tax deduction on contributions, no tax on growth, no tax on withdrawals. Dividends from Canadian corporations held in a TFSA don't generate the dividend tax credit — but since the dividend itself is tax-free, the credit isn't needed.
How withdrawals work
Withdrawals can be taken at any time for any reason, with no tax consequence. The amount withdrawn is added back to contribution room on January 1 of the following year — not immediately.
Withdrawn and then re-contributed in the same calendar year can trigger an over-contribution penalty if the account was already at its limit. The penalty is 1% per month on the excess.